Optimism Grows for 2024

15th January 2024

Optimism Grows for 2024

Following the positive shift in sentiment towards the end of 2023, the movements in the financial market now reflect a growing optimism for 2024.

Sterling Overnight Index Average (SONIA) Swaps:

Real estate debt lenders utilise SONIA swaps to hedge floating debt, with these rates playing a crucial role in determining fixed pricing in the market. Lenders secure their margins through this hedging process, so when SONIA swaps are expensive, fixed-rate debt follows suit.

Over the past few months, SONIA swaps have been on a downward trajectory, partially influenced by an improved outlook on inflation in the UK. This decline suggests market expectations for potential falls in the Bank of England Base Rate (BOEBR). Currently, the 5-year SONIA swap rate sits at 3.588%, a significant decrease from the highs of 5.4% observed in October 2022.

In alignment with these developments, many lenders are reducing their fixed-rate offerings. Presently, 5-year fixed residential products feature margins as low as 0.5% above the Base Rate, while commercial products are available with margins as low as 1.5% above the Base Rate.

This reduction in mortgage rates is anticipated to enhance liquidity in the build-to-sell market, as developers foresee quicker sales and stronger valuations due to changing demand dynamics.

Base Rate Expectations:

Notably, some forecasts suggest a potential decrease in the Bank of England Base Rate by Q2 2024, with market participants speculating that the base rate could be as low as 4% by the end of the year. As many lenders price their products based on the floating base rate, this could lead to a reduction in the cost of debt throughout the year. Consequently, individuals may secure higher leverage on investment facilities and larger land advances for development, thanks to improved serviceability and minimised financing tranches.